For whatever reason, expatriation is on the upswing. In just five years, the number of U.S. expatriates has increased from fewer than 1,000 (932) in 2012 to 2,999 in 2013, 3,415 in 2014, 4,279 in 2015 — and reached a record 5,411 in 2016.
The Tax Cost of Expatriation
Permanently departing the U.S. can have a tax cost. Under current rules, covered expatriates are subject to special expatriation tax rules [IRC §877A].
Covered expatriates include individuals who give up their U.S. citizenship and green card holders who give up or lose their right to permanent residence in the U.S. An expatriated individual is subject to the special tax rules if any of the following apply:
- the individual’s average annual net income tax liability for the five years before the expatriation date is more than an inflation-adjusted amount ($162,000 for 2017);
- the individual’s net worth is $2 million or more on the expatriation date; or
- the individual fails to certify on Form 8854 (see below) that he has complied with all U.S. federal tax obligations for the five years before the expatriation date.
A U.S. citizen will be treated as a covered expatriate as of the earlier of:
- the date the individual renounces his U.S. nationality before a diplomatic or consular officer of the U.S., provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
- the date the individual furnishes the State Department with a signed statement of voluntary relinquishment of U.S. nationality, provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
- the date the State Department issues the individual a certificate of loss of nationality; or
- the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.
A green card holder ceases to be a lawful permanent resident if:
- the individual’s permanent residence status has been revoked, or has been administratively or judicially determined to have been abandoned; or
- the individual (1) becomes a resident of a foreign country under the provisions of a tax treaty between the U.S. and the foreign country, (2) does not waive the benefits of the treaty, and (3) notifies the IRS on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
Under current rules, covered expatriates are subject to a “mark-to-market” tax. That is, the individual is treated as if his property had been sold for its fair market value on the day before the expatriation or residency termination. Any net gain on the deemed sale is recognized to the extent it exceeds an inflation-adjusted threshold amount ($699,000 for 2017). The amount subsequently realized on an actual sale of the property is adjusted for gain or loss taken into account for purposes of the mark-to-market tax.
An expatriate can elect to defer payment of the mark-to-market tax until the due date for the return for the year the property is disposed of. The expatriate must post a bond in order to defer tax and interest charged for the period the tax is deferred. The election is irrevocable and is made on a property-by-property basis. The mark-to-market tax may not be deferred beyond the due date of the return for the taxable year which includes the individual’s death.
Individuals who expatriate must file Form 8854, Initial and Annual Expatriation Information Statement. Section I of the form calls for general information, including the date of the individual’s expatriating act. Current expatriates must complete Parts IV and V of the form to provide further information about their expatriation status, property held on the date of expatriation and certain financial information.
As a general rule, expatriates will not need to file Form 8854 in future years unless they elect to defer the mark-to-market tax or have certain deferred compensation or trust income. Special rules apply to individuals who expatriated before June 17, 2008, which may require ongoing filing of Form 8854.
CAUTION: The IRS reminds tax practitioners that anyone who has expatriated or terminated U.S. permanent residency must file Form 8854; a $10,000 penalty can be imposed for failure to file.